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Don't Buy Diversified Royalty Corp. (TSE:DIV) For Its Next Dividend Without Doing These Checks

It looks like Diversified Royalty Corp. (TSE:DIV) is about to go ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Diversified Royalty's shares on or after the 14th of October will not receive the dividend, which will be paid on the 29th of October.

The company's next dividend payment will be CA$0.018 per share, on the back of last year when the company paid a total of CA$0.20 to shareholders. Last year's total dividend payments show that Diversified Royalty has a trailing yield of 7.3% on the current share price of CA$2.77. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Diversified Royalty has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Diversified Royalty

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. An unusually high payout ratio of 261% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Diversified Royalty generated enough free cash flow to afford its dividend. It paid out an unsustainably high 333% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Diversified Royalty intends to continue funding this dividend, or if it could be forced to cut the payment.

Cash is slightly more important than profit from a dividend perspective, but given Diversified Royalty's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Diversified Royalty's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. With slack earnings growth and paying out substantially more than it reported in profit last year, this dividend is potentially at risk of being cut.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past seven years, Diversified Royalty has increased its dividend at approximately 1.0% a year on average.

Final Takeaway

Is Diversified Royalty worth buying for its dividend? Diversified Royalty is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, at the same time as its earnings per share are struggling to grow. It's not that we think Diversified Royalty is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Diversified Royalty and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that Diversified Royalty is showing 3 warning signs in our investment analysis, and 2 of those can't be ignored...

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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